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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 333-36160
================================================================================
RITA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 94-3199149
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
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967 N. Shoreline Blvd.
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
650-314-3400
(Registrant's telephone number, including area code)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 2000, there were 13,984,041 shares of the registrant's
Common Stock outstanding.
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (unaudited).
Condensed Balance Sheets - September 30, 2000 and 2
December 31, 1999
Condensed Statements of Operations - Three and nine months 3
ended September 30, 2000 and 1999
Condensed Statements of Cash Flows - Three and nine months 4
ended September 30, 2000 and 1999
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities and Use of Proceeds. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RITA MEDICAL SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except per share data, unaudited)
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<CAPTION>
September 30, December 31,
2000 1999
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Assets
Current assets:
Cash and cash equivalents........................................................... $ 29,084 $ 7,067
Marketable securities............................................................... 13,889 5,086
Accounts receivable, net............................................................ 2,274 1,149
Inventories, net.................................................................... 1,459 845
Prepaid assets and other current assets............................................. 921 616
-------- --------
Total current assets........................................................... 47,627 14,763
Property and equipment, net........................................................... 974 875
Other assets.......................................................................... 62 67
-------- --------
Total assets................................................................... $ 48,663 $ 15,705
======== ========
Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.................................................................... $ 461 $ 892
Accrued liabilities................................................................. 1,573 956
Current portion of long term obligations............................................ 1,583 478
-------- --------
Total current liabilities............................................................. 3,617 2,326
Long term notes payable............................................................... 0 1,091
Long term obligations................................................................. 254 763
-------- --------
Total liabilities.............................................................. 3,871 4,180
-------- --------
Contingency (Note 7)
Convertible preferred stock, $.001 par value.......................................... - 37,911
-------- --------
Preferred stock warrants.............................................................. - 605
-------- --------
Stockholders' deficit:
Common stock, $0.001 par value........................................................ 14 1
Additional paid-in capital............................................................ 88,828 3,651
Deferred stock compensation........................................................... (5,417) (1,935)
Receivable from stockholder........................................................... (247) (73)
Accumulated other comprehensive loss.................................................. (18) (7)
Accumulated deficit................................................................... (38,368) (28,628)
-------- --------
Total stockholders' equity (deficit)........................................... 44,792 (26,991)
-------- --------
Total liabilities, convertible preferred stock and stockholders' equity $ 48,663 $ 15,705
(deficit) ======== ========
</TABLE>
See accompanying notes.
2
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RITA MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
2000 1999 2000 1999
------- -------- -------- --------
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Sales................................... $ 2,712 $ 1,197 $ 6,980 $ 3,096
Cost of goods sold...................... 1,622 797 4,298 2,105
------- --------- -------- --------
Gross profit......................... 1,090 400 2,682 991
Operating expenses:
Research and development.............. 1,262 928 4,335 2,478
Selling, general and administrative... 3,023 1,188 8,347 3,860
------- --------- -------- --------
Total operating expenses............. 4,285 2,116 12,682 6,338
------- --------- -------- --------
Loss from operations.................... (3,195) (1,716) (10,000) (5,347)
Interest and other expense, net......... 239 38 259 148
------- --------- -------- --------
Net loss................................ $(2,956) $(1,678) $ (9,741) $(5,199)
======= ========= ======== ========
Net loss per share, basic and diluted
(Note 2)................................ $ (0.31) $ (2.09) $ (2.47) $ (6.58)
======= ========= ======== ========
Shares used in computing basic and
diluted net loss per share.............. 9,607 803 3,945 790
</TABLE>
See accompanying notes.
3
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RITA MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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<CAPTION>
Nine Months Ended
September 30,
2000 1999
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<S> <C> <C>
Operating activities:
Net loss...................................................... $ (9,741) $(5,199)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 784 307
Amortization of stock-based compensation..................... 4,022 661
Allowance for doubtful accounts 34 19
Allowance for inventory reserve (28) 104
Changes in operating assets and liabilities
Accounts receivable......................................... (1,159) (650)
Inventories................................................. (586) (678)
Prepaid and other current assets............................ (421) (44)
Accounts payable and accrued liabilities.................... 186 100
Net cash used in operating activities...................... (6,909) (5,380)
--------- --------
Investing activities:
Purchases of property and equipment.......................... (344) (178)
Purchases of short term investments.......................... (12,370) (3,263)
Maturities of short term investments......................... 3,556 3,205
--------- --------
Notes receivable and other assets............................ 5 (27)
--------- --------
Net cash used in investing activities...................... (9,153) (263)
--------- --------
Financing activities:
Proceeds from issuance of common and preferred stock.......... 38,998 7,983
Proceeds from long term debt.................................. 1,500 1,500
Payments on long term debt (3,000) -
Proceeds from revolving term loan............................. 770 486
Payments on capital lease obligations......................... (189) (109)
--------- --------
Net cash provided by financing activities.................. 38,079 9,860
--------- --------
Net increase in cash and cash equivalents..................... 22,017 4,217
Cash and cash equivalents at beginning of period.............. 7,067 5,322
Cash and cash equivalents at end of period.................... $ 29,084 $ 9,539
========= ========
</TABLE>
See accompanying notes.
4
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RITA MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
by Rita Medical Systems, Inc. (the "Company") in accordance with generally
accepted accounting principles for interim financial information that are
consistent in all material respects with those applied in the company's
financial statements contained in our Registration Statement on Form S-1 (No.
333-36160) for the fiscal year ended December 31, 1999 and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed financial statements contain all adjustments
(all of which are normal and recurring in nature) necessary to present fairly
the financial position, results of operations and cash flows of the Company for
the periods indicated. Interim results of operations are not necessarily
indicative of the results to be expected for the full year or any other interim
periods. These condensed consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto for the years
ended December 31, 1997, 1998 and 1999 contained in our Registration Statement
on Form S-1.
2. Net loss per share and pro forma net loss per share
Basic earnings per share figures are calculated based on the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share would give effect to the dilutive effect of common stock equivalents
consisting of stock options, common stock subject to repurchase and shares
issuable upon conversion of the preferred stock and warrants. Potentially
dilutive securities of 2,172,794 and 10,075,846 have been excluded from the
dilutive earnings per share computations for the periods ended September 30,
2000 and September 30, 1999 respectively as they have an antidilutive effect due
to the Company's net losses.
The computation of pro forma net loss per share, using the as-if-converted
method to include shares issuable upon the conversion of outstanding shares of
convertible preferred stock from the original date of issuance, results in net
loss per share figures of $(0.23) and $(0.19) for the three months ended
September 30, 2000 and September 30, 1999 respectively. The pro forma net loss
per share figures for the nine month periods ended September 30, 2000 and
September 30, 1999 are $(0.89) and $(0.65) respectively. The numbers of shares
used in performing the pro forma net loss per share computations are 12,617,279
and 8,786,426 for the three month periods ended September 30, 2000 and September
30, 1999 respectively. For the nine month periods ended September 30, 2000 and
September 30, 1999, the share figures used in the pro forma net loss per share
computations are 10,890,661 and 7,980,304 respectively.
3. Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss such
as unrealized gains or losses on available-for-sale marketable securities. For
the three and nine month periods ended September 30, 2000 and September 30,
1999, reported net loss approximated comprehensive net loss.
4. Inventories (in thousands)
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September 30, December 31,
2000 1999
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Inventories:
Raw materials................. $ 233 $ 250
Work-in-process............... 199 28
Finished goods................ 1,027 567
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$1,459 $ 845
====== =====
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5. Recent Accounting Pronouncements
5
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of relationship that exists. The
Company, to date, has not engaged in derivative or hedging activities. The
Company will adopt SFAS No. 133, as required, in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes some areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition
principles comply with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock compensation" -an interpretation of
APB 25. This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combinations. This Interpretation was effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15,1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 did not have a material impact on
the Company's financial statements.
6. Stock Split
On May 1, 2000, the board of directors approved a 3-for-5 reverse stock split
of the common and preferred stock. Stockholders' approval of the reverse stock
split was obtained on June 20, 2000. All share and per share amounts in the
accompanying financial statements have been adjusted retroactively.
7. Contingency
The Company is involved in a patent interference proceeding with
RadioTherapeutics Corporation in which the validity of a patent issued to the
Company has been called into question. Although the Company believes it has
meritorious defenses, if it does not prevail in this interference, it could be
prevented from selling the RITA System or be required to pay license fees and
or royalties on past and future product sales.
8. Initial Public Offering
The Company effected a registration with the Securities and Exchange
Commission on Form S-1, as amended, Registration No. 333-36160 (the
"Registration Statement"), whereby the Company registered up to 3,600,000
shares of its Common Stock. On August 1, 2000, the Company completed its
initial public offering of 3,600,000 shares of Common stock, at a price of
$12.00 per share, that raised approximately $39.0 million, net of underwriting
discounts, commissions and other offering costs. Upon the closing of the
offering, all of the Company's convertible preferred stock converted into
approximately 8.9 million shares of common stock.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", and similar
expressions identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to risks and uncertainties,
which could cause actual results to differ materially from those expressed or
forecasted. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Factors That May Affect
Future Results" and those appearing elsewhere in this Form 10-Q. Readers are
cautioned not to place undue reliance on these forward-looking statements which
reflect management's analysis only as of the date hereof. We assume no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
Overview
We develop, manufacture and market innovative products that use radio-
frequency energy to treat patients with solid cancerous or benign tumors. From
inception in 1994 through 1996, our operations consisted primarily of various
start-up activities, including development of technologies central to our
business, recruiting personnel and raising capital. In 1997, we began commercial
shipment of our products. In the second quarter of 2000, we commercially
launched our next-generation Model 1500 generator and StarBurst XL disposable
devices.
All of our sales are generated from the sale of our disposable devices and
radio-frequency generators. For the nine months ended September 30, 2000, sales
through our direct sales force in the United States accounted for 40% of our
total sales while sales to our international distributors accounted for 60% of
our total sales. We currently intend to continue building our direct sales
force in the United States and selling through third-party distribution partners
internationally. We expect that a significant portion of our revenue will
continue to come from international operations because of the high incidence of
primary liver cancer in Asian and European markets. In the nine months ended
September 30, 2000, 64% of our sales were derived from our disposable devices
and 36% were derived from the sale of our generators. We plan to focus on
expanding our base of customer accounts and increasing usage of our disposable
products.
We recognize revenue upon receipt of a purchase order and shipment of
products to customers. Our return policy allows customers to return products
received in damaged or non-working condition up to 60 days after receipt of the
product. To date, returns have been insignificant.
Our manufacturing costs consist of raw materials, including generators
produced for us by third-party suppliers, labor to produce our disposable
devices and to inspect incoming, in-process and finished goods, sterilization
performed by an outside service provider and general overhead expenses. Gross
profit margins are affected by production volumes, average selling prices, and
the sales mix of disposable devices versus generators.
In the nine months ended September 30, 2000, 34% of our operating expenses
were related to research and development activities, while 66% of our operating
expenses were related to selling, general and administrative activities. We
expect to continue to devote a large amount of our resources to product
development and clinical research programs. However, we expect to devote a
growing proportion of our operating expenses to selling, general and
administrative activities, particularly to our sales and marketing efforts.
These efforts include increasing the size of our domestic sales force and our
international distribution support activities as well as establishing formal
physician and patient awareness and education programs.
In connection with the grant of stock options to employees and non-employees,
we record deferred stock-based compensation as a component of stockholders'
equity. This stock-based compensation is amortized as charges to operations over
the vesting periods of the options. We recorded amortization of deferred
compensation of $4.0 million and $0.7 million for the nine months ended
September 30, 2000 and 1999, respectively. We expect to record additional
amortization expense for deferred compensation in future periods.
We incurred net losses of approximately $9.7 million in the first nine months
of 2000. As of September 30, 2000, we had an accumulated deficit of $38.4
million. Due to the high costs associated with continued research and
development programs, expanded clinical research programs and increased sales
and marketing efforts, we expect to continue to incur net losses for the next
few years.
Our product sales have mainly been to a group of early adopting physicians
who treat patients with cancerous tumors of the liver. Our opportunity for
further market penetration and increased revenues will depend on additional
sales efforts, longer-term supporting clinical data and physician awareness and
education programs.
7
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Our future growth depends on expanding product usage in our current market
and finding new large markets in which we can leverage our core technologies of
applying radiofrequency energy to treat cancerous and benign tumors. To the
extent our current or new markets do not materialize in accordance with our
expectations, our sales could be lower than expected.
We are currently involved in patent proceedings and may become a party to
additional patent or product liability proceedings. The costs of such lawsuits
or proceedings may be material and could affect our earnings and financial
position. An adverse outcome in a patent lawsuit could require us to cease sales
of affected products or to pay royalties and/or license fees, which could harm
our results of operations.
Results of Operations
Sales increased 127% to $2.7 million in the quarter ended September 30, 2000
from $1.2 million for the quarter ended September 30, 1999. For the nine month
period ended September 30, 2000 sales increased 125% to $7.0 million from $3.1
million in the comparable period in 1999. Higher unit shipments of generators
and disposables resulted from increased physician awareness of our technology,
expansion of our domestic sales force, increased geographical representation
through the appointment of new international distributors and the launch of our
next-generation Model 1500 generator and StarBurst XL disposable devices.
Cost of goods sold for the quarter ended September 30, 2000 was $1.6 million
as compared to $0.8 million for the corresponding period in 1999. Cost of goods
sold for the nine months ended September 30, 2000 was $4.3 million as compared
to $2.1 million for the nine months ended September 30, 1999. The growth in
cost of goods sold was attributable primarily to higher material, labor, and
overhead costs associated with increased unit shipments. Also, charges for
amortization of deferred stock-based compensation were higher. Amortization of
deferred stock-based compensation was $279,000 in the three-month period ended
September 30, 2000 as compared to $31,000 in the corresponding period in 1999
and $654,000 in the nine-month period ended September 30, 2000 as compared to
$87,000 in the corresponding period in 1999.
Research and development expenses for the three months ended September 30,
2000 were $1.3 million as compared to $0.9 million for the corresponding period
in 1999. Research and development expenses for the nine months ended September
30, 2000 were $4.3 million as compared to $2.5 million for the corresponding
period in 1999. The expense increase was due to additional personnel, expenses
associated with the development of our next-generation disposable devices and
generators, increased clinical program spending, increased spending related to
the growth and protection of our patent portfolio and increases in the
amortization of deferred stock-based compensation. Amortization of deferred
stock-based compensation was $213,000 in the three-month period ended September
30, 2000 versus $53,000 in the corresponding period in 1999 and $814,000 in the
nine-month period ended September 30, 2000 as compared to $214,000 in the
corresponding period of 1999.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $3.0 million as compared to $1.2 million in the
corresponding period in 1999. Selling, general and administrative expenses for
the nine months ended September 30, 2000 were $8.3 million as compared to $3.9
million in the corresponding period of 1999. The increase resulted from the
addition of sales and clinical support personnel as well as spending associated
with the launch of our next-generation disposable devices and generators.
General and administrative expenses increased due to added personnel to support
our growth in operations and increased costs associated with our operation as a
public company. Amortization charges of deferred stock-based compensation were
also higher: $580,000 in the three-month period ended September 30, 2000 as
compared to $121,000 in the corresponding period in 1999 and $2.5 million in the
nine-month period ended September 30, 2000 as compared to $360,000 in the
corresponding period of 1999.
Net interest and other (expense) income for the three months ended September
30, 2000 was $239,000 as compared to $38,000 in the corresponding period of
1999. Net interest and other income for the nine months ended September 30, 2000
was $259,000 as compared to $148,000 in the corresponding period of 1999. The
change in net interest and other income was primarily attributable to earnings
on short-term investments made with cash received from our initial public
offering of common shares completed during the quarter. Also, repayment of
approximately $3.0 million in term debt reduced interest expense for the
quarter.
Liquidity and Capital Resources
Prior to August of 2000, we financed our operations principally through
private placements of convertible preferred stock, raising approximately $37.9
million net of expenses. On August 1, 2000, we completed our initial public
offering of 3.6 million common shares at a price of $12 per share, raising
approximately $39.0 million net of expenses. All outstanding convertible
preferred shares were converted to common shares at this time. As of September
30, 2000 the company also had $1.8 million in revolving debt and equipment
financing.
8
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As of September 30, 2000, we had $29.1 million of cash and cash equivalents
and $13.9 million of marketable securities, which together comprised our primary
source of liquidity. We had $44.0 million of working capital.
For the nine months ended September 30, 2000, net cash used in operating
activities was $6.9 million principally due to our net loss. Also, increases in
accounts receivable and inventories, driven by growth in operations, consumed
cash. Investing activities for the period were dominated by the purchase of
short-term investment instruments with the cash raised by our initial public
offering of common shares. For the nine months ended September 30, 2000, net
cash provided by financing activities was $38.0 million, attributable to our
initial public offering of common shares, partially offset by the borrowing and
repayment of debt.
In June 1999, we entered into a loan and security agreement for a loan
facility of up to $5.0 million. The facility consists of two term loans of $1.5
million each and a revolving credit note of up to $2.0 million. As of September
30, 2000, we had drawn down $1.3 million of the revolving credit note, but all
previous borrowings under the term loans, totaling approximately $3.0 million,
had been repaid.
Our capital requirements depend on numerous factors including our research
and development expenditures, expenses related to selling and marketing and
working capital to support business growth. Although it is difficult for us to
predict future liquidity requirements with certainty, we believe that our
current cash and cash equivalents will satisfy our cash requirements for at
least the next 18 months. During or after this period, if cash generated by
operations is insufficient to satisfy our liquidity requirements, we may need to
sell additional equity or debt securities or obtain an additional credit
facility . There can be no assurance that additional financing will be available
to us or, if available, that such financing will be available on terms favorable
to the company and our stockholders.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects.
Due to our dependence on the RITA system, failure to achieve market acceptance
in a timely manner could harm our business.
Because all of our revenue comes from the sale of the RITA system, our
financial performance will depend upon physician adoption and patient awareness
of this system. If we are unable to convince physicians to use the RITA system,
we may not be able to generate revenues because we do not have alternative
products.
We have a history of losses, anticipate significant increases in our operating
expenses over the next several years and may never achieve profitability.
We anticipate that our operating expenses will increase substantially in
absolute dollars for the foreseeable future as we expand our sales and
marketing, manufacturing, clinical research and product development efforts. To
become profitable, we must continue to increase our sales. If sales do not
continue to grow, we may not be able to achieve or maintain profitability in the
future. In particular, we incurred net losses of $6.7 million in 1998 and $7.5
million in 1999. Our loss for the nine-month period ended September 30, 2000 was
$9.7 million, and we had an accumulated deficit of approximately $38.4 million
through that date.
We currently lack long-term data regarding the safety and efficacy of our
products and may find that long-term data does not support our short-term
clinical results.
Our products are supported by an average clinical follow-up of between five
and 14 months in published clinical reports. If longer-term studies fail to
confirm the effectiveness of our products, our sales could decline. If longer-
term patient follow-up or clinical studies indicate that our procedures cause
unexpected, serious complications or other unforeseen negative effects, we could
be subject to significant liability. Further, because some of our data has been
produced in studies that were not randomized and/or included small patient
populations, our clinical data may not be reproduced in wider patient
populations. We are involved in two clinical studies using our system which are
expected to produce twelve month or longer follow-up data. Both studies are at
an early stage. We do not know when these studies will be completed or published
and we do not have preliminary data from either of these studies. If the data
produced is not favorable, our business could be harmed.
Because we face significant competition from companies with greater resources
than we have, we may be unable to compete effectively.
9
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The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants.
We compete directly with two companies: RadioTherapeutics Corporation, a
privately held company, and Radionics, Inc., a division of Tyco International, a
publicly traded company with substantial resources. Both RadioTherapeutics and
Radionics sell products that use radiofrequency energy to ablate soft tissue.
RadioTherapeutics has entered into a distribution arrangement with Boston
Scientific Corporation, a publicly traded company with substantially greater
resources than we have.
Alternative therapies could prove to be superior to the RITA system, and
physician adoption could be negatively affected.
In addition to competing against other companies offering products that use
radiofrequency energy to ablate soft tissue, we also compete against companies
developing, manufacturing and marketing alternative therapies that address both
cancerous and benign tumors. If these alternative therapies prove to offer
treatment options that are superior to our system, physician adoption of our
products could be negatively affected and our revenues could decline.
We are currently involved in a patent interference action and a patent
opposition action involving RadioTherapeutics Corporation and if we do not
prevail in these actions, we may be unable to sell the RITA system.
In July 1999, the United States Patent and Trademark Office declared an
interference involving us, which was provoked by RadioTherapeutics Corporation,
a competitor of ours, in which the validity of a patent claim previously issued
to us is being called into question. The claim being questioned is one of a
number of issued patent claims that cover the curvature of the array at the tip
of our disposable devices. We believe that the inventor named in our patent was
the first to invent this subject matter. RadioTherapeutics believes they
invented this curvature first. In March 2000, RadioTherapeutics Corporation
filed an opposition to our European Patent No. 0777445. This patent also covers
the curvature of the array at the tip of our disposable devices. In this
opposition, the validity of our issued patent is being questioned. Final
resolution of these matters is not expected for several years.
Patent issues involve complex legal and factual issues. In the event we do
not prevail in the interference action, we could be prevented from selling the
RITA system unless we could, either obtain a license from RadioTherapeutics to
use the relevant patent or were able to modify our product. We may not be able
to modify the RITA system successfully, and we cannot be certain that any
modified system would achieve market acceptance or regulatory approval. If we
were unable to sell our system and unable to develop a commercially successful
alternative or obtain a license, to the relevant patent or patents on
commercially reasonable terms, our business could be materially harmed. If we do
not prevail in the opposition proceeding, we could lose our only currently
issued patent in Europe.
Patents and other proprietary rights provide uncertain protections, and we may
be unable to protect our intellectual property.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products, and yet we may be unable to do
so. A number of companies in our market, as well as universities and research
institutions, have issued patents and have filed patent applications which
relate to the use of radiofrequency energy to ablate soft tissue. Our pending
United States and foreign patent applications may not issue or may issue and be
subsequently successfully challenged by others and invalidated. In addition, our
pending patent applications include claims to material aspects of our products
that are not currently protected by issued patents. Both the patent application
process and the process of managing patent disputes can be time consuming and
expensive.
Competitors may be able to design around our patents or develop products
which provide outcomes which are comparable to ours. In addition, the laws of
some foreign countries may not protect our intellectual property rights to the
same extent as do the laws of the United States. In the event a competitor
infringes upon our patent or other intellectual property rights, enforcing those
rights may be difficult and time consuming. Even if successful, litigation to
enforce our intellectual property rights or to defend our patents against
challenge could be extensive and time consuming and could divert our
management's attention. We may not have sufficient resources to enforce our
intellectual property rights or to defend our patents against a challenge.
In addition, confidentiality agreements executed by our employees,
consultants and advisors may not be enforceable or may not provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure.
Because the medical device industry is characterized by competing intellectual
property, we may be sued for violating the intellectual property rights of
others.
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The medical device industry is characterized by a substantial amount of
litigation over patent and other intellectual property rights. Determining
whether a product infringes a patent involves complex legal and factual issues,
and the outcome of patent litigation actions is often uncertain. Our competitors
may assert that our products and the methods we employ in the use of our
products are covered by United States or foreign patents held by them. However,
we do not believe that we infringe any valid patent rights held by others. In
addition, because patent applications can take many years to issue, there may be
applications now pending of which we are unaware, which may later result in
issued patents which our products may infringe. There could also be existing
patents that one or more of our products may inadvertently be infringing of
which we are unaware. As the number of competitors in the market for less
invasive cancer treatment alternatives grows, and as the number of patents
issued in this area grows, the possibility of a patent infringement claim
against us increases.
To address patent infringement or other intellectual property claims, we may
have to enter into licensing agreements or agree to pay royalties at a
substantial cost to our business. We may be unable to obtain necessary licenses.
A valid claim against us, and our failure to license the technology at issue,
could prevent us from selling our products.
If we are sued for patent infringement, we could be prevented from selling our
products and our business could suffer.
We are aware of the existence of patents held by competitors in our market,
which could result in a patent lawsuit against us. In the event that we are
subject to a patent infringement lawsuit and if the relevant patents were upheld
as valid and enforceable and we were found to infringe, we could be prevented
from selling our products unless we could obtain a license or were able to
redesign the product to avoid infringement. If we were unable to obtain a
license or successfully redesign our system, we may be prevented from selling
our system and our business could suffer.
You may have a difficult time evaluating our company as an investment because we
have a limited operating history.
You can only evaluate our business based on a limited operating history
because we began selling the RITA system in 1997. This short history may not be
adequate to enable you to fully assess our ability to achieve market acceptance
of our products and respond to competition.
Our dependence on international revenues, which account for a significant
portion of our revenues, could harm our business.
Because our future profitability will depend in part on our ability to grow
product sales in international markets, we are exposed to risks specific to
business operations outside the United States. These risks include:
. obtaining reimbursement for procedures using our devices in some foreign
markets;
. the burden of complying with complex and changing foreign regulatory
requirements;
. longer accounts receivable collection time;
. significant currency fluctuations, which could cause our distributors to
reduce the number of products they purchase from us because the cost of our
products to them could increase relative to the price they could charge their
customers;
. reduced protection of intellectual property rights in some foreign
countries; and
. contractual provisions governed by foreign laws.
We are substantially dependent on two distributors in our international markets,
and if we lose either distributor or are unable to attract additional
distributors, our international and total revenues could decline.
We are substantially dependent on a limited number of significant
distributors in our international markets, and if we lose these distributors and
fail to attract additional distributors, our international revenues could
decline. ITX Corporation, formerly known as Nissho Iwai Corporation, is our
primary distributor in Asia. It accounted for 55 percent of our international
revenues for the nine months ended September 30, 2000 and 63 percent of our
international revenues in fiscal 1999. M.D.H.s.r.l. Forniture Ospedaliere, which
is our distributor in Italy, accounted for 18 percent of our international
revenues for the nine months ended September 30, 2000 and 22 percent of our
international revenues for fiscal 1999. Because international revenues accounted
for 60 percent of our total revenues for the nine months ended September 30,
2000 and these two distributors represented 73 percent of
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that total, the loss of either distributor could cause revenues to decline
substantially. If we are unable to attract additional international
distributors, our international revenues may not grow.
Our relationships with third-party distributors could negatively affect our
sales.
We sell our products in international markets through third-party
distributors over whom we have limited control, and, if they fail to adequately
support our products, our sales could decline. If our distributors or we
terminate our existing agreements, finding companies to replace them could be an
expensive and time-consuming process and sales could decrease during any
transition period.
Any failure to build and manage our direct sales organization may negatively
affect our revenues.
We are currently building a direct sales force in the United States and if we
do not expand our sales force over the next twelve months, we may not achieve
our revenue growth goals. There is intense competition for skilled sales and
marketing employees, especially for people who have experience selling
disposable devices and generators to the physicians in our target market, and we
may be unable to hire skilled individuals to sell our products. Any inability to
build our direct sales force could negatively impact our growth.
We depend on key employees in a competitive market for skilled personnel and
without additional employees, we cannot grow or achieve profitability.
We are highly dependent on the principal members of our management,
operations and research and development staff. Our future success will depend in
part on the continued service of these individuals and our ability to identify,
hire and retain additional personnel, including sales and marketing staff. The
market for qualified management personnel in Northern California, where our
offices are located, is extremely competitive and is expected to continue to be
highly competitive. Because the environment for good personnel is so
competitive, costs related to compensation may increase significantly. If we are
unable to attract and retain the personnel we need to support and grow our
business, our business will suffer.
If third-party payors do not reimburse health care providers for use of the RITA
system, purchases could be delayed and our revenues could decline.
Physicians, hospitals and other health care providers may be reluctant to
purchase our products if they do not receive substantial reimbursement for the
cost of the procedures using our products from third-party payors, such as
Medicare, Medicaid and private health insurance plans. Procedures using our
products are currently reimbursed based on established general reimbursement
codes. Because there is no specific reimbursement code for procedures using the
RITA system, physicians need to submit a patient case history and data
supporting the applicability of our system to the patient's condition in order
to obtain reimbursement. Each payor then determines whether and to what extent
to reimburse for a medical procedure or product. Payors may refuse to provide
reimbursement for procedures covered by general codes because the applicability
of the code must be determined on a case-by-case basis. If a payor refuses to
reimburse the cost of our procedure under existing reimbursement codes, we could
be required to establish new specific codes. This process is time consuming and
costly and requires us to provide extensive supporting scientific, clinical and
cost-effectiveness data for our products to the American Medical Association.
Even if we were successful in establishing a new code, a payor still may not
reimburse adequately for the procedure or product. In addition, we believe the
advent of fixed payment schedules has made it difficult to receive reimbursement
for disposable products, even if the use of these products improves clinical
outcomes. Fixed payment schedules typically permit reimbursement for a procedure
rather than a device. If physicians believe that our system will add cost to a
procedure but will not add sufficient offsetting economic or clinical benefits,
physician adoption could be slowed.
We may be subject to costly and time-consuming product liability actions.
We manufacture medical devices that are used on patients in both minimally
invasive and open surgical procedures and as a result, we may be subject to
product liability lawsuits. To date, we have not been subject to a product
liability claim; however, any product liability claim brought against us, with
or without merit, could result in the increase of our product liability
insurance rates or the inability to secure coverage in the future. In addition,
we could have to pay any amount awarded by a court in excess of policy limits.
Finally, even a meritless or unsuccessful product liability claim could be time
consuming and expensive to defend and could result in the diversion of
management's attention from managing our core business.
Any failure in our physician training efforts could result in lower than
expected product sales.
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It is critical to our sales effort to train a sufficient number of physicians
and to instruct them properly in the procedures which utilize our products. We
plan to establish formal physician training programs and will rely on physicians
to devote adequate time to understanding how our products should be used. If
physicians are not properly trained, they may misuse or ineffectively use our
products. This may result in unsatisfactory patient outcomes, patient injury and
related liability or negative publicity which could have an adverse effect on
our product sales.
If we fail to support our anticipated growth in operations, our business could
suffer.
If we fail to execute our sales strategy and develop further our products,
our business could suffer. To manage anticipated growth in operations, we must
increase our quality assurance staff for both our generators and our disposable
devices and expand our manufacturing staff and facility for our disposable
devices. Our systems, procedures and controls may not be adequate to support our
expected growth in operations.
We have limited experience manufacturing our disposable devices in substantial
quantities, and if we are unable to hire sufficient additional personnel,
purchase additional equipment or are otherwise unable to meet customer demand
our business could suffer.
To be successful, we must manufacture our products in substantial quantities
in compliance with regulatory requirements at acceptable costs. If we do not
succeed in manufacturing quantities of our disposable devices which meet
customer demand, we could lose customers and our business could suffer. At the
present time, we have limited manufacturing experience. Our manufacturing
operations are currently focused on the in-house assembly of our disposable
devices. As we increase our manufacturing volume and the number of product
designs for our disposable devices, the complexity of our manufacturing
processes will increase. Because our manufacturing operations are primarily
dependent upon manual assembly, if demand for our system increases we will need
to hire additional personnel and may need to purchase additional equipment. If
we are unable to sufficiently staff our manufacturing operations or are
otherwise unable to meet customer demand for our products, our business could
suffer.
We are dependent on one supplier which is the only source of a component that we
use in our disposable devices, and any disruption in the supply of this
component could negatively affect our revenues.
Because there is only one supplier that provides us with a component that we
include in our disposable devices, a disruption in the supply of this component
could negatively affect revenues. This supplier is the only source of this
component. If we were unable to remedy a disruption in supply of this component
within twelve months, we could be required to redesign the handle of our
disposable devices which could significantly impair our ability to sell our
products. In addition, a new or supplemental filing with applicable regulatory
authorities may require clearance prior to our marketing a product containing
new materials. This clearance process may take a substantial period of time, and
we may be unable to obtain necessary regulatory approvals for any new material
to be used in our products on a timely basis, if at all. This could also create
supply disruptions that could negatively affect our business.
We are dependent on third-party contractors for the supply of our generators,
and any failure to deliver generators to us could result in lower than expected
revenues.
One third-party supplier currently manufactures, to our specifications, one
of the generators we sell. There is only one other third-party contractor who we
have used who could readily assume this manufacturing function. Two third-party
suppliers produce our second-generation generator. We have agreements with both
of these suppliers. Any delay in shipments of generators to us could result in
our failure to ship generators to customers and could negatively affect
revenues.
Complying with the FDA and other domestic and international regulatory
authorities is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties.
We are subject to a host of federal, state, local and international
regulations regarding the manufacture and marketing of our products. In
particular, our failure to comply with FDA regulations could result in, among
other things, seizures or recalls of our products, an injunction, substantial
fines and/or criminal charges against our employees and us. The FDA's medical
device reporting regulations require us to report any incident in which our
products may have caused or contributed to a death or serious injury, or in
which our products malfunctioned in a way that would be likely to cause or
contribute to a death or serious injury if the malfunction recurred. As of
September 30, 2000, we had filed eight medical device reports with the FDA
related to skin burns caused by a ground pad primarily due to placement, one
report related to an arterial bleed caused by improper needle placement and one
report related to an abscess which resulted from the large volume of ablated
tissue. We believe that none of these incidents were attributed to a device
malfunction. None of these incidents resulted in permanent injury or death.
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Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer than that required for FDA
approval or clearance, and requirements for foreign licensing may differ from
FDA requirements. For example, some of our new products have not received
approval in Japan. Any failure to obtain necessary regulatory approvals for our
new products in foreign countries could negatively affect revenues.
Product introductions or modifications may be delayed or canceled as a result of
the FDA regulatory process which could cause our revenues to be below
expectations.
Unless we are exempt, we must obtain the appropriate FDA approval or
clearance before we can sell a new medical device in the United States. This
can be a lengthy and time-consuming process. To date, all of our products have
received clearances from the FDA through premarket notification under Section
510(k) of the Federal Food, Drug and Cosmetic Act. However, if the FDA requires
us to submit a new premarket notification under Section 510(k) for modifications
to our existing products, or if the FDA requires us to go through a lengthier,
more rigorous examination than we now expect, our product introductions or
modifications could be delayed or canceled which could cause our revenues to be
below expectations. The FDA may determine that future products will require the
more costly, lengthy and uncertain premarket approval process. In addition,
modifications to medical device products cleared via the 510(k) process may
require a new 510(k) submission. We have made minor modifications to our system.
Using the guidelines established by the FDA, we have determined that these
modifications do not require us to file new 510(k) submissions. If the FDA
disagrees with our determinations, we may not be able to sell the RITA system
until the FDA has cleared new 510(k) submissions for these modifications. In
addition, we intend to request additional label indications, such as approvals
or clearances for the ablation of tumors in additional organs, including lung,
bone and breast, for our current products. The FDA may either deny these
requests outright, require additional extensive clinical data to support any
additional indications or impose limitations on the intended use of any cleared
product as a condition of approval or clearance. Therefore, obtaining
necessary approvals or clearances for these additional applications could be an
expensive and lengthy process.
We may incur significant costs related to a class action lawsuit due to the
likely volatility of our stock.
Our stock price may fluctuate for a number of reasons including:
. failure of the public market to support the valuation established in our
initial public offering;
. our ability to successfully commercialize our products;
. announcements of technological or competitive developments;
. announcements regarding patent litigation or the issuance of patents to us
or our competitors;
. regulatory developments regarding us or our competitors;
. acquisitions or strategic alliances by us or our competitors;
. quarterly fluctuations in our results of operations;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. general market conditions, particularly for companies with small market
capitalizations.
Securities class action litigation is often brought against a company after a
period of volatility in the market price of its stock. If our future quarterly
operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. Stock price
fluctuations may be exaggerated if the trading volume of our common stock is
low. Any securities litigation claims brought against us could result in
substantial expense and divert management's attention from our core business.
We may need to raise additional capital in the future resulting in dilution to
our stockholders.
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We may need to raise additional funds for our business operations and to
execute our business strategy. We may seek to sell additional equity or debt
securities or to obtain an additional credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to our
stockholders. If additional funds are raised through the issuance of debt
securities, these securities could have rights that are senior to holders of
common stock and could contain covenants that would restrict our operations. Any
additional financing may not be available in amounts or on terms acceptable to
us, if at all.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval.
Because our executive officers and directors, and their respective
affiliates, own approximately 30 percent of our outstanding common stock, these
stockholders may, as a practical matter, be able to exert significant influence
over matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combinations. This
concentration of voting stock could have the effect of delaying or preventing a
change in control.
Our certificate of incorporation and Delaware law contain provisions that could
discourage a takeover or prevent or delay a merger that stockholders believe is
favorable for the company.
Our amended and restated certificate of incorporation and bylaws contain
provisions that could delay or prevent a change in control of our company. Some
of these provisions:
. authorize the issuance of preferred stock, which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those of
common stock;
. provide for a classified board of directors; and
. prohibit stockholder action by written consent.
In addition, the provisions of Section 203 of Delaware General Corporate Law
govern us. These provisions may prohibit large stockholders, in particular those
owning 15 percent or more of our outstanding voting stock, from merging or
combining with us. These and other provisions in our amended and restated
certificate of incorporation and bylaws and under Delaware law could reduce the
price that investors might be willing to pay for shares of our common stock in
the future and result in the market price being lower than it would be without
these provisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk disclosures have not changed significantly from those
set forth in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Form S-1 filing dated July 26, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material legal proceedings, other than
the patent disputes described in "Factors That May Affect Future Results - We
are currently involved in a patent interference action and a patent opposition
action involving RadioTherapeutics Corporation and if we do not prevail in these
actions, we may be unable to sell the RITA system." The patent interference
proceeding is pending before the Board of Patent Appeals and Interferences of
the United States Patent and Trademark Office. On July 16, 1999 the United
States Patent and Trademark Office declared an interference between a claim of
one of our issued patents and claims of a patent application controlled by
RadioTherapeutics Corporation. The principal parties in the proceeding are
RadioTherapeutics and RITA. The factual basis underlying the claim is the
determination by the commissioner of the United States Patent and Trademark
Office that our patent and the RadioTherapeutics patent application interfere.
In the interference proceeding, RadioTherapeutics seeks to invalidate our patent
claim and to establish the patentability of the claims in their patent
application. We seek to maintain the priority of our patent claim. The
European opposition is pending before the European Patent Office and was
instituted on March 2, 2000. The principal parties are RadioTherapeutics and
RITA. The factual basis underlying the claim is the allegation by
RadioTherapeutics that our European patent is not valid. In the opposition,
RadioTherapeutics seeks to have our patent declared invalid and to have our
patent cancelled. We are defending our patent and seek to defend it as issued.
In addition to these patent proceedings, we may from time to time become a party
to various legal proceedings arising in the ordinary course of our business.
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Item 2. Changes in Securities and Use of Proceeds
On July 26, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-36160) was declared effective by the
Securities and Exchange Commission, pursuant to which 3,600,000 shares of our
Common Stock were sold on August 1, 2000 for the account of the Company at a
price of $12.00 per share, generating aggregate gross proceeds of $43.2 million
before payment of underwriting discounts and commissions and transaction
expenses. The managing underwriters were Salomon Smith Barney and Robertson
Stephens. After deducting approximately $3.0 million in underwriting discounts
and commissions and an estimated $1.2 million in other transaction expenses, the
net proceeds of the offering were approximately $39.0 million. None of the
payments for underwriting discounts and commissions and other transaction
expenses represented direct or indirect payments to directors, officers or other
affiliates of the Company. The net proceeds of the offering have been invested
in short-term, investment grade interest bearing securities. We intend to use
such proceeds to expand sales, marketing and physician and patient awareness and
education programs, to continue product development and clinical research
programs, to repay debt and to fund general corporate purposes, including
working capital. As of September 30, 2000, we had applied the estimated
aggregated net proceeds of $39.0 million from our initial public offering as
follows:
Temporary investments: $36.0 million
Repayment of term loans: $3.0 million
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K: Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RITA MEDICAL SYSTEMS, INC.
By: /s/ Marilynne Solloway
----------------------
Marilynne Solloway
Chief Financial Officer and Vice
President, Finance and Administration
Date: November 14, 2000
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EXHIBIT INDEX
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27.1 Financial Data Schedule.
